If it looks too good to be true, it might be a Ponzi scheme

It’s hard to spot a Ponzi scheme until it’s too late, but it’s not impossible.

Scams like the ones run by Bernard Madoff and Long Island’s very own Nicholas Cosmo often use their so-called reputations to lure investors into trusting them. However, those advisers and their clients have simply been duped.

Too often, advisers didn’t look beyond the payouts, failing to realize they were coming from other investments, the definition of a classic Ponzi scheme, said Brian Valery, president of Westbury-based Resolutions Investigation & Risk Management, which investigates and performs due diligence on investment firms.

Consistently high returns, once a telltale sign of a good investment, now could be a signal something’s not right, said Michael Kresh, chief investment officer at M.D. Kresh Financial Services in Islandia.

Both Cosmo and Madoff paid ridiculously high returns in a declining market, netting investors a more than 10 percent return much of the time.

“The lesson a regular investor should take from this is when the markets are doing poorly, you should expect to be doing poorly too,” Kresh said.

Investors should also watch out for guaranteed long-term high returns, Valery said.

“If someone says they will produce 10 percent returns forever, that’s just not realistic because the economy and markets fluctuate greatly,” he said.

And then there’s, perhaps, the easiest thing an investor could do: conduct a Web search on management and staff.

In the case of Agape World’s Cosmo, who is awaiting a bail hearing after being arrested for an alleged $370 million scheme, a quick Internet search would have revealed he lost his securities license and served jail time.

“With Google, you can check anybody,” Kresh said. “I just Googled the guy and it didn’t take more than five minutes to realize something was wrong.”

Finding a blemish like that is a huge red flag, he added.

After an Internet search, investors can check with regulatory bodies to make sure the person taking their money is licensed and registered, Kresh said.

Kresh said to think twice before investing with someone not registered with the Financial Industry Regulatory Authority or, in the case of an investment adviser, with either New York state or the Securities and Exchange Commission.

Scott Frost, an investment specialist with Strategies for Wealth, which has offices in Manhattan, Westchester and Jericho, said investors should also look at a company’s track record, how long it’s been in business and its historical returns.

“If they’re telling the truth, you should be able to find all that information,” he said.

Investors should check the forms they receive when they first invest, look at their monthly statements and make sure they can regularly review their account, not just once a month, experts said.

Frost said he expects investors will now pay more attention to an investment firm’s prospectus, the legal investment publication that defines fees, expenses and risks.

“That’s something people usually do not do,” he added.

If investors need more help making sure their investment firm is on the up and up, they can hire a company like Valery’s to investigate for them.

“In the past, individual investors have dealt with us post-investment, but we’ve seen an uptick in people coming to us for help before they invest,” Valery said.

5 comments

The basic laws of finance are immutable.
High return requires high risk. It’s time
to be very suspicious if high returns are
promised with low risk and no fluctuation.
— David Pinkowitz (www.dcpmarketing.com)

And further if you google Brian Valery you will find he had his own scheme of pretending to be a lawyer when he wasn’t – he is now a convicted criminal himself
Hello Author of this article..did you fact check your source??